Transcript FISCAL FITNESS ON THE WEB

State Fiscal
Challenges
National Association of
Business Economists
Regional Roundtable
Teleconference
December 15, 2009
Donald J. Boyd
Senior Fellow
State & local governments’ role as implementers of domestic policy has
grown. Larger than feds, and now about 55% of domestic spending
Government Direct Domestic General Expenditures as % of GDP
(Grants counted in government that finally spends them)
20%
State-local expenditures
(including from federal grants)
18%
16%
14%
12%
Federal domestic
direct expenditures
(excludes defense & grants)
10%
8%
6%
4%
2%
0%
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Sources: Federal Budget for Fiscal Year 2010 (Historical Table 3.1 outlays in total and by category; Table 12.1 grants)
Census Bureau Government Finance data (direct general expenditures)
Rockefeller Institute of Government
2
Recessions and state-local finances
• Most of the “action” – in terms of automatic impact of
recession on finances – is on the revenue side of the
budget. (Pensions are an important exception. Medicaid
also an exception – next slide.)
• Different revenue structures, different impacts:
– Feds have the most volatile revenue structure (But who cares?
Annual balance not a goal)
– States almost as volatile – and they must balance annual
budgets.
– Local governments (and states that rely on property taxes)
generally less volatile. State aid often a great source of risk and
volatility.
• Different recessions, different risks, different impacts on
states – depends on interaction of economic turmoil with
state revenue structures
Rockefeller Institute of Government
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Feds: Revenue oriented toward income taxes
States: Income and sales (with significant exceptions!)
Locals: Property tax and non-tax revenue
- Great variation across states Government revenue in fiscal year 2006
Revenue components
as % of own-source total
Revenue in $ billions
Federal
General revenue
Own-source revenue
Nontax
Total Taxes
Individual income tax
General sales tax
Property tax
Corporate income tax
Other taxes
State
Local
Federal
State
Local
$2,399.4
$1,385.4
$1,243.7
100.0
143.4
162.0
2,399.4
101.8
2,297.6
1,846.1
0.0
0.0
350.0
101.5
966.2
255.4
710.9
245.9
226.7
11.8
47.5
179.0
767.6
283.2
484.4
22.7
55.5
347.3
5.5
53.4
100.0
4.2
95.8
76.9
0.0
0.0
14.6
4.2
100.0
26.4
73.6
25.4
23.5
1.2
4.9
18.5
100.0
36.9
63.1
3.0
7.2
45.2
0.7
7.0
Sources: Federal - U.S. Department of the Treasury Financial Statements for 2006, re-categorized by Rockefeller
Institute; State and local - U.S. Bureau of the Census
Notes: Federal individual income tax includes FICA and other payroll taxes. Federal, state, and local taxes exclude
unemployment insurance taxes.
Rockefeller Institute of Government
4
Medicaid and the business cycle
• Sustained rise in unemployment leads to fewer workers
covered by employer-sponsored insurance, increase in
Medicaid/SCHIP enrollment, and increase in costs of
uncompensated care for uninsured adults
• Holahan & Garrett estimate unemployment rise from
4.6% (2007) to 10% would lead to 3.4m more children
enrolled in Medicaid/SCHIP and 2.0m more adults; 2009
annual costs of $7.4b and $11.2b respectively, $18.6b
total. State share of this is about $8b annually.
• In addition, they estimate 5.8m more uninsured adults,
and increase in uncompensated care costs of $7.2b
(federal/state/other split not clear).
• Total, all levels of gov’t, about $25.8b annual rate.
Holahan, John and Bowen Garrett, Rising Unemployment, Medicaid and the Uninsured, The Urban
Institute, For Henry J. Kaiser Family Foundation, January 2009.
Rockefeller Institute of Government
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Real retail sales - a sales tax driver – were hit hard
Year-on-year growth coming soon. Level will be far below peak
Real retail sales in selected recessions
2001 rec.
Cumulative % change since start of recession
5
1990 rec.
1973 rec.
0
Recession
1973
1980
1990
2001
2007
-5
Nov 2009 (est.)
1980 rec.
-10
0
5
10
15
20
25
30
35
Months since start of recession
Sources: Cleveland Federal Reserve Bank (pre-1990 retail sales), Census Bureau (1990+), and Bureau of Labor Statistics (CPI)
Rockefeller Institute of Government
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1963 Q1
1964 Q1
1965 Q1
1966 Q1
1967 Q1
1968 Q1
1969 Q1
1970 Q1
1971 Q1
1972 Q1
1973 Q1
1974 Q1
1975 Q1
1976 Q1
1977 Q1
1978 Q1
1979 Q1
1980 Q1
1981 Q1
1982 Q1
1983 Q1
1984 Q1
1985 Q1
1986 Q1
1987 Q1
1988 Q1
1989 Q1
1990 Q1
1991 Q1
1992 Q1
1993 Q1
1994 Q1
1995 Q1
1996 Q1
1997 Q1
1998 Q1
1999 Q1
2000 Q1
2001 Q1
2002 Q1
2003 Q1
2004 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
Each of the last two quarters per Census (Jan-Mar and Apr-Jun)
was worst for state government taxes in 5+ decades
State government quarterly tax collections, inflation-adjusted
% change vs. year ago
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Sources: Census Bureau (taxes); BEA (GDP price index)
Rockefeller Institute of Government
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Local taxes holding up better than state taxes,
but have been weakening
State tax collections and local tax collections, inflation-adjusted
% change vs. year ago
15%
10%
5%
19
89
q2
19
90
q2
19
91
q2
19
92
q2
19
93
q2
19
94
q2
19
95
q2
19
96
q2
19
97
q2
19
98
q2
19
99
q2
20
00
q2
20
01
q2
20
02
q2
20
03
q2
20
04
q2
20
05
q2
20
06
q2
20
07
q2
20
08
q2
20
09
q2
0%
-5%
State
Local
-10%
-15%
-20%
Sources: Census Bureau (taxes); BEA (GDP price index)
NOTE: 2-quarter average of % change, to make trends more discernible
Rockefeller Institute of Government
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Despite housing bust, for nation as a whole property tax continues to be
far more stable than PIT and sales. (Some state-specific exceptions)
State and local quarterly tax collections, inflation-adjusted
% change vs. year ago
20%
15%
10%
5%
-15%
20
09
q2
20
08
q2
20
07
q2
20
06
q2
20
05
q2
20
04
q2
20
03
q2
20
02
q2
20
01
q2
20
00
q2
19
19
99
q2
98
q2
97
q2
19
-10%
19
96
q2
95
q2
19
19
94
q2
93
q2
19
19
92
q2
19
91
q2
19
90
q2
89
19
-5%
q2
0%
PIT
Sales tax
Property tax
-20%
-25%
Sources: Census Bureau (taxes); BEA (GDP price index)
NOTE: 2-quarter average of % change, to make trends more discernible
Rockefeller Institute of Government
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Recent tax collections
• Jan-Mar 2009 down 11.7% vs. year ago,
sharpest decline in 50+ years of recorded data
• Apr-Jun even worse: Tax revenue down 17%
• July-Sep preliminary RIG data: Down in all 49
states for which we had data
– Personal income tax (PIT): -11.3%, down in all 40
states with data
– Corporate income tax (CIT): -17.5%, down in 38 of 44
states with data
– General sales tax (GST): -8.8%, down in 43 of 44
states
• Oct: prelim data for 38 states, down 15.6%, down
in 34 of 38; PIT -14%, CIT -6.3%, GST -10.5%
• Nov: federal taxes down 14% (partly legislation)
Rockefeller Institute of Government
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Preliminary Jul-Sep data: Total tax revenue
down 11%. Down in all 49 reporting states.
Preliminary tax collections for July-September 2009
Percent change from year earlier
PIT
CIT
Sales
Total
United States
(11.3)
(17.5)
(8.8)
(11.1)
New England
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
(12.8)
(13.9)
(11.8)
(13.1)
(2.9)
(9.2)
(10.1)
2.5
(6.7)
(13.8)
(21.8)
(39.0)
2.4
(24.6)
(7.1)
(43.4)
3.3
(10.0)
(13.5)
(9.6)
(10.0)
(1.6)
(6.7)
(8.4)
Mid-Atlantic
Delaware
Maryland
New Jersey
New York
Pennsylvania
(8.0)
(10.6)
(8.4)
(8.9)
(7.4)
(8.9)
(14.5)
(61.8)
(30.9)
(20.6)
(3.7)
(15.0)
(7.5)
(8.5)
(5.9)
(8.1)
(7.4)
(9.3)
(15.7)
(10.5)
(11.8)
(8.9)
(7.5)
Great Lakes
Illinois
Indiana
Michigan
Ohio
Wisconsin
(12.8)
(11.7)
(20.3)
(12.0)
(14.1)
(8.1)
(26.7)
(28.4)
(42.4)
(24.7)
(111.3)
9.2
(9.8)
(13.1)
(10.9)
(7.1)
(9.2)
(8.7)
(11.2)
(12.6)
(14.2)
(8.2)
(12.1)
(9.7)
Plains
Iowa
Kansas
Minnesota
Missouri
Nebraska
North Dakota
South Dakota
(9.3)
(5.7)
(10.6)
(11.8)
(8.1)
(6.8)
(3.7)
(27.5)
(67.3)
(28.7)
(22.2)
(8.5)
(35.4)
(46.3)
(7.6)
(0.2)
(5.9)
(14.8)
(6.0)
(4.3)
(10.0)
(6.9)
(9.7)
(5.0)
(12.5)
(12.3)
(6.9)
(7.6)
(17.3)
(8.8)
(5.9)
(5.9)
PIT
Southeast
Alabama
Arkansas
Florida
Georgia
Kentucky
Louisiana
Mississippi
North Carolina
South Carolina
Tennessee
Virginia
West Virginia
(9.1)
(26.7)
(6.9)
CIT
Sales
Total
(6.9)
(6.7)
(5.2)
(23.3)
(21.4)
(11.0)
(10.5)
(40.5)
61.6
(19.1)
(0.4)
17.4
8.2
(7.9)
(5.1)
(9.2)
(13.0)
(11.1)
(8.1)
(14.7)
(7.5)
(16.7)
(12.4)
(3.7)
(6.8)
(9.5)
(5.5)
(4.6)
(8.1)
(6.5)
(7.8)
(8.6)
(13.9)
(5.5)
(14.9)
(11.8)
(3.4)
(5.7)
(5.4)
(6.6)
(10.4)
Southwest
Arizona
New Mexico
Oklahoma
Texas
(15.0)
(14.0)
(43.3)
(38.4)
(13.7)
(17.0)
(17.0)
(16.3)
(16.3)
(52.2)
(15.0)
(13.1)
(28.4)
(15.4)
Rocky Mountain
Colorado
Idaho
Montana
Utah
Wyoming
(11.7)
(14.3)
(4.8)
(14.4)
(8.3)
(49.0)
(24.6)
(39.1)
(61.4)
(72.5)
(16.1)
(12.0)
(12.9)
(16.0)
(14.1)
(9.8)
(20.2)
(20.5)
(27.0)
Far West
Alaska
California
Hawaii
Nevada
Oregon
Washington
(15.3)
(5.1)
(16.0)
(6.7)
(13.9)
(68.4)
(11.3)
(27.3)
(12.0)
(26.1)
(14.6)
(7.1)
(0.7)
(12.2)
(5.9)
(6.2)
(23.0)
(25.2)
(1.0)
(11.8)
(14.4)
(12.6)
(12.7)
(52.4)
(8.7)
(9.4)
(8.9)
(12.1)
(5.8)
Source: Lucy Dadayan, Rockefeller Institute of Government
Rockefeller Institute of Government
11
Capital gains – what will happen to 2009 gains?
•
Gains fell 46% in 2001 and again in
2002 (23%)
Capital gains as % of gross domestic product
8
•
1986 tax
reform
Fell significantly (50+%?) in 2008
7
•
•
•
•
Stock market is up 17% since start
of year, but YTD average value for
2009 is still about 29% below
average for 2008
Estimated payments fell 31% in
April (median); also fell in June.
Large decline in Sept seems likely
(Fed non-withheld down 28%)
2000
2007
6
5
4
Many forecasters expect 2nd decline 3
in 2009
median for period
2008e
2
Additional uncertainty about gains
in 2010 due to federal tax law
changes
1
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Sources: (1) Capital gains: 1954-1998: Table capgain1-2001.pdf from IRS Statistics of Income web site (www.irs.gov/taxstats); 1999-2007 07in14ar.xls and similar SOI files;
(2) Gross domestic product from U.S. Bureau of Economic Analysis
Rockefeller Institute of Government
12
2010
Why doesn’t economic recovery
feel like fiscal recovery?
• Sales taxes & withholding nearly contemporaneous with underlying
economic activity so payment lags for these major sources are NOT
the source of a fiscal lag
• Employment can lag GDP recovery; so can non-wage income (see
next slide)
• Capital gains, after a crash, can recover sharply and still be far below
their prior peak. And some (not all) tax payments on capital gains
and other nonwage income can lag the income – e.g., in April-June
2011 taxpayers will settle up on gains earned in 2010
• Pension contributions will be increasing as the economy is
recovering, creating fiscal pressure
• Medicaid costs rising
• Fiscal lag, in part, is perception and policy choice - spending rarely
declines along with tax revenue, and states patch the gaps. Even
after tax revenue starts growing from its trough, it can take years to
reach its prior peak. So when tax revenue resumes growth it does
not feel like fiscal recovery.
Rockefeller Institute of Government
13
Wages and consumption of goods – important to state revenue –
have recovered more slowly than GDP in most recessions
Real per-capita GDP, wages, and goods consumption in recent recessions
# quarters after GDP recovery
began before prior peak was
reattained
Recession beginning
in:
1948
1953
1957
1960
1969
1973
1980
1990
2001
2007
GDP
Wages
1
3
3
2
1
4
3
6
1
2
4
4
3
4
10
5
13
17
Goods
0
2
4
7
1
4
8
14
1
% decline, peak quarter to
trough quarter
GDP
(3.2)
(3.2)
(4.5)
(2.0)
(1.4)
(4.3)
(3.3)
(2.0)
(0.1)
(4.9)
Wages
(4.1)
(4.2)
(5.3)
(2.1)
(2.1)
(6.7)
(3.6)
(3.8)
(3.9)
(7.1)
Goods
(1.0)
(2.0)
(3.9)
(3.8)
(2.2)
(4.4)
(7.3)
(5.5)
(0.3)
(10.1)
Source: Bureau of Economic Analysis. Real wages and goods consumption are nominal amounts
deflated by personal consumption expenditure price index.
Note: Table treats April-June 2009 as trough quarter in current recession, but actual trough may
occur later
Rockefeller Institute of Government
14
Taxes can take 3-5 or more years to re-attain
prior peak (absent tax increases)
Taxes adjusted for population growth, inflation, and legislative changes
By fiscal year, indexed to approximate start of each fiscal crisis (Year 0)
110
1981
1990
2001
2008 Low-Gap Scenario
2008 High-Gap Scenario
105
100
-3
-2
-1
0
1
2
3
4
5
95
90
85
Sources: Tax revenue (Census Bureau and Rockefeller Institute estimates), Inflation (BEA GDP price index),
Legislative changes (NGA/NASBO Fiscal Survey of States Fall 2008)
Rockefeller Institute of Government
15
Hard to catch up with a crisis: Three consecutive
years of shortfalls in last 2 recessions. Now?
State tax revenue shortfalls in periods near recessions
Adopted-budget projections compared with actual results (or, for 2009, most-recent estimates)
Shortfall in $ millions
Shortfall as % of tax source
1991 recession period
Fiscal year
1989
Sales tax
557
1990
1991
1992
1990-1992 Sum
(1,100)
(4,502)
(2,408)
(8,010)
1994
1,492
Sum of major
taxes
3,326
Sales tax
0.6%
(3,148)
(3,269)
(1,125)
(7,542)
(5,275)
(12,574)
(8,380)
(26,229)
-1.2%
-4.6%
-2.3%
-2.7%
-1.1%
-4.6%
-4.4%
-3.4%
-12.6%
-13.4%
-4.9%
-10.4%
-2.5%
-5.6%
-3.5%
-3.9%
1,178
1,906
1.4%
-0.7%
4.8%
0.8%
Income tax Corporate tax
3.9%
1.9%
Sum of major
taxes
3.2%
Income tax Corporate tax
2,769
n/a
(1,027)
(4,803)
(4,847)
(10,677)
(764)
Income tax Corporate tax
3.2%
n/a
Sum of major
taxes
1.9%
2001 recession period
Fiscal year
2000
2001
2002
2003
2001-2003 Sum
2004
Sales tax
4,756
542
(5,450)
(5,866)
(10,774)
877
Income tax
7,020
Corporate
tax
615
Sum of major
taxes
12,391
Sales tax
2.7%
944
(27,504)
(19,285)
(45,845)
(1,759)
(6,177)
(1,135)
(9,071)
(273)
(39,131)
(26,286)
(65,690)
0.4%
-3.3%
-3.4%
-2.3%
0.6%
-12.8%
-9.7%
-8.0%
-7.2%
-21.3%
-4.1%
-11.2%
-0.1%
-9.5%
-6.6%
-5.8%
3,210
2,090
6,177
0.5%
1.7%
7.7%
1.6%
Income tax
10,046
Corporate
tax
5,916
Income tax Corporate tax
4.0%
12.6%
Sum of major
taxes
3.3%
2007 recession period
Fiscal year
2007
2008
2009
Sales tax
730
(3,638)
(12,304)
5,714
(26,432)
(1,282)
(9,096)
Sum of major
taxes
16,692
Sales tax
0.3%
794
(47,832)
-1.7%
-5.6%
2.1%
-9.3%
-2.5%
-17.4%
0.1%
-8.6%
NOTES: (1) FY 2009 based on spring responses, before shortfalls in income tax returns and sharp deterioration in sales tax, (2) Actual shortfalls for FY 2009
will be much larger than the numbers shown above (reported by NASBO in Spring 2009), (3) FY 2001 does not include California
Source: NASBO/NGA Fiscal Survey of the States, fall of relevant year for prior recessions; spring 2009 for 2007 current recession
Rockefeller Institute of Government
16
Timing of policy response to the 2001 crisis
Timing of state government response to the 2001 fiscal crisis
Fiscal year
2001
2002
2003
2004
2005
Indicators of the magnitude
of the crisis
Responses as % of tax revenue
(Positive numbers reduce the budget gap)
What happened to
total spending?
Revenue
Real per-capita
shortfall
tax revenue (income, sales,
growth
and corporate
taxes)
Tax and
revenue
enactments
Growth in real percapita spending
financed from own
sources
0.1%
-7.0%
-0.6%
3.6%
5.3%
-0.1%
-9.5%
-6.6%
1.6%
4.2%
Use of fund
balance
0.8%
4.8%
0.3%
-1.9%
-2.9%
Midyear
budget cuts
0.3%
2.6%
1.5%
0.4%
0.1%
-1.0%
0.1%
1.5%
1.6%
0.5%
3.4%
2.0%
0.3%
-2.2%
2.7%
Sources: Rockefeller Institute analsis of (1) data on fund balances, midyear budget cuts, and tax and revenue enactments from
NASBO/NGA Fall Survey of the States, and (2) Tax and expenditure data from the Census Bureau.
Rockefeller Institute of Government
17
Historically, states face budget gaps and raise
taxes well after recovery is underway
Enacted tax changes as % of tax revenue, four fiscal crises
Recession(s) of:
Jan 1980 to Nov 1982
1980
1981
1982
1983
1984
-1.4%
0.3%
2.4%
2.1%
5.4%
Recession of:
Jul 1990 to Mar 1991
1989
1990
1991
1992
1993
0.3%
1.7%
3.4%
4.7%
0.9%
Recession of:
Mar 2001 to Nov 2001
2001
2002
2003
2004
2005
-1.0%
0.1%
1.5%
1.7%
0.5%
Recession of:
Dec 2007 to ????
2009
2010
2011
2012
2013
0.2%
3.4%
?
?
?
means economic
recovery underway
Notes: (1) Fiscal year is year in which change took effect, not year of enactment; (2) positive numbers are tax increases,
negative numbers are tax cuts; (3) In almost all states, fiscal year ends on June 30 of year shown above; (4) Recession dates
are month of start to month of end; (5) Jan 1980 to Nov 1982 recession period is combined period of two consecutive
recessions
Sources: NGA/NASBO Fall 2009 Fiscal Survey of the States (tax change estimates); Census Bureau (tax collections);
Rockefeller Institute (estimated 2009 and 2010 collections); National Bureau of Economic Research (recession dates)
Rockefeller Institute of Government
18
The cliff: Baseline gaps of >$100b re-emerge under
“high-gap” assumptions (absent recurring budget actions)
"High-Gap" Scenario:
State general revenue minus expenditures with and without federal stimulus
4%
Balance (gap) as % of general expenditures
2%
Without stimulus
With stimulus plan
0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
-2%
-4%
-6%
-8%
State fiscal year
Rockefeller Institute of Government
19
Concluding comments & questions
•
CBPP estimates $92+b of budget
gaps for 2011, at least 37 states
•
Shortfalls are still emerging in
2010 and 2011 projections may
worsen
Additional considerations
•
•
•
Loss of federal stimulus
•
•
OPEB and pensions
Medicaid – demographic & cost pressures
•
Tax structures
On the other hand, we are nearing
the point at which revenue will
start to grow y-o-y – albeit will be
far below prior peak
Table Source: McNichol, Elizabeth and Johnson, Nicholas, Recession
Continues to Batter State Budgets, Center on Budget and Policy Priorities,
November 19, 2009
Rockefeller Institute of Government
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Rockefeller
Institute
The Public Policy Institute of
the
State University of New York
411 State Street
Albany, NY 12203-1003
www.rockinst.org
Donald J. Boyd,
Senior Fellow
[email protected]
Appendix
Rockefeller Institute of Government
22
A majority of states have begun cutting state government employment
(although reductions are far smaller than in private sector)
Percent change in state government employment
August-October 2009 vs. year earlier
Montana
Arizona
Connecticut
Kentucky
Idaho
North Carolina
Ohio
Indiana
Massachusetts
New Jersey
Hawaii
Washington
Delaware
New York
Louisiana
Maine
Tennessee
South Carolina
Georgia
Kansas
Vermont
New Hampshire
New Mexico
Minnesota
West Virginia
(12.4)
(7.5)
(4.4)
(4.1)
(4.0)
(3.6)
(3.6)
(3.5)
(3.4)
(3.2)
(3.2)
(2.9)
(2.9)
(2.9)
(2.6)
(2.5)
(2.3)
(2.2)
(1.7)
(1.7)
(1.3)
(1.2)
(1.2)
(1.1)
(0.6)
Michigan
Nevada
Wyoming
Alabama
Utah
California
Illinois
Oregon
Iowa
Maryland
Florida
Virginia
Rhode Island
Wisconsin
Missouri
Oklahoma
Pennsylvania
Mississippi
Colorado
Alaska
South Dakota
Arkansas
Nebraska
Texas
North Dakota
(0.6)
(0.5)
(0.4)
(0.4)
(0.3)
(0.0)
0.0
0.3
0.4
0.5
0.6
0.8
1.1
1.1
1.1
1.3
1.5
2.2
2.3
2.4
2.4
3.4
4.9
5.6
5.8
Source: BLS Current Employment Statistics
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